Clouds Darken Trump’s Sunny Economic View

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Aug. 6, 2018

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CreditAlexander Glandien

Like a Volkswagen Beetle mounted with a V-8 engine, the American economy has a lot more power than it can handle right now, and it’s making a lot of noise. So is President Trump, who takes singular credit for a robust second-quarter rise in the gross domestic product of 4.1 percent, something that hasn’t happened under any other president since … Barack Obama. While Mr. Trump praised himself effusively — he’s good at that, isn’t he? — the stock market seemed unimpressed. Friday’s announcement that 157,000 new jobs were added in July, a modest gain or perhaps a seasonal glitch, elicited an even more subdued reaction. That’s because if you look down the line, there are few clear reasons to be so enthusiastic.

“Over all, we see this report as supportive of our views that the economy is currently firing on all cylinders,” wrote Bricklin Dwyer, a senior economist with BNP Paribas, after the new G.D.P. numbers were announced. But there was a caveat: Mr. Dwyer said that “growth is likely peaking. Indeed, in our forecasts, [the second quarter] marks a high-water mark for growth.”

Then there’s the flattening yield curve, which the St. Louis Federal Reserve’s president, James Bullard, warns could invert late this year if current conditions persist. That means short-term rates, such as those for two-year Treasury bonds, run higher than long-term rates, like the 10-year bond, a sign of pessimism that is a well-known red flag. Recessions tend to follow an inverted yield curve like a stray cat looking for a meal.

Purchases of goods drove about a third of that second-quarter economic increase, according to the St. Louis Fed. Consumers were in a spending mood this spring, an attitude that won’t necessarily continue. In the prior quarter, they kept their hands in their pockets. At some point, they were spending the banks’ money, though: Credit cards and other revolving loans had increased to an annual rate of 5.1 percent in June. A recent Reuters analysis found that the bottom 60 percent of income-earners have been fueling their spending, and thus the economy’s, by using their savings or credit cards. They almost have to, because wage growth is expanding at a disappointing 2.7 percent annual clip — despite evidence that employers are finally throwing a few more pennies at workers.

The prospects for wage growth ought to be good, given the tighter labor supply. But American companies have made an art form of not sharing the wealth with workers. Productivity growth has vastly outstripped real wage growth since the 1970s, according to Deutsche Bank research. Yet employees are working harder and smarter and not getting commensurately remunerated, while corporations have a record share of the national wealth. That is to say, workers have been getting ripped off.

Inflation measured by the Consumer Price Index, which is up 2.9 percent over the past year, is absorbing some of those improving wages. Consumers are also running into higher gasoline prices — up more than 20 percent in the past year — thanks to rising oil prices, with the prospect of volatility in the Middle East not helping. Energy is excluded from the basic C.P.I.

Given that it is the Federal Reserve’s job to hold inflation to 2 percent and keep the economy from overheating, interest rates have been rising, to Mr. Trump’s expressed disapproval. Most economists expect two more rate increases this year, which will make housing more expensive. That has ever more implications for the housing market, which should be expanding and contributing to economic growth. Instead, housing is getting fenced in by rising mortgage rates, as well as high prices and low inventory. You may recall what happened the last time housing slumped, in 2007. Rising interest rates also make some revolving credit more expensive.

Now consider the administration’s effort to apply the sledgehammer to the economy’s toes via a trade war and ensuing tariffs on imported steel and aluminum, among other products. Alcoa, the country’s largest aluminum maker, as well as a big aluminum importer, said its operating earnings could take as much as a $100 million hit. Not only have the tariffs contributed to $1 billion in higher costs for General Motors, they are now contributing to rising prices of everything from Cokes to vacuum cleaners as companies pass along those costs to consumers. Some of these are easily deferred purchases, and that’s what consumers are doing in the case of Electrolux.

Nor are trade wars kind to exports. Trade contributed 1.1 points to that 4.1 percent second-quarter increase, including a huge bump in pretariff soybean exports to China. Kiss that goodbye. Expect to see one percentage point of G.D.P. wiped out in the third quarter, says Ian Shepherdson, chief economist of Pantheon Macroeconomics. Take that, China.

All of this seems like a pretty poor return on investment for Mr. Trump’s $1.5 trillion tax cuts, at least for most working-class Americans, who benefited least from the tax cuts. None of these issues by themselves will put the brakes on an economy that is powering along with a 3.9 percent unemployment rate. But the friction is building. And just like any powerful car engine, economic expansions — and this one is in its 10th year — eventually run out of gas. Expect Mr. Trump, who never runs out of gas, to blame the Democrats for that.

Mr. President, while you like to take credit for positive economic trends that are well beyond your control, you will own the downside, too.